Site Mobile Navigation

EMI’s New Boss Sees Cracks in Music World

Guy Hands, the chief of the private equity firm Terra Firma, right, is seeking to make a success of the British recording company EMI, which has distributed the work of artists like the Beatles, left.Credit
Left, Associated Press; right, Terra Firma

One evening last autumn a group of about 10 artist managers, including representatives for the pop stars Kylie Minogue and Robbie Williams as well as an executive who oversees the Beatles catalog, clustered around a table in an executive dining room at the London headquarters of EMI. The purpose was to size up the new boss, Guy Hands, and discuss the future of the record business.

Mr. Hands, the private equity financier who had made a fortune sprucing up pubs in England and gas stations on the German autobahn, told the gathering that Rupert Murdoch had privately scoffed at his acquisition of EMI by saying, “MySpace is going to be the future of music, not record labels.”

“I said I was going to prove him wrong,” Mr. Hands recalled in a recent interview.

It has been almost 10 months since Mr. Hands, through his private equity firm Terra Firma, bought EMI for about $6.4 billion, and by several accounts, including Mr. Hands’s own, it has been a chaotic time.

The company now wobbles under a huge debt load, a leadership vacuum — it has no chief executive and most major decisions are made by Mr. Hands — and low morale among many of its employees. Mr. Hands said about 80 percent of the $6.4 billion paid for EMI was for the music publishing unit, which owns copyrights and provides a steady flow of cash.

A large restructuring, announced in January, will soon lay off 1,500 to 2,000 of EMI’s roughly 5,500 employees. Most recently, the company has been negotiating the exit of Jason Flom, the chairman of Capitol Music Group who oversees recorded music in the United States.

By contrast, when a group of investors led by Edgar Bronfman Jr. bought the Warner Music Group in 2003 for $2.6 billion they moved quickly to restructure: the deal closed on a Monday, a restructuring plan was announced on a Tuesday and within a month $250 million in annualized costs were slashed.

In many ways, the pains suffered by EMI are typical for the music industry in the past few years. But for many culturally attuned Britons, EMI is a cherished institution.

EMI’s corporate roots stretch back to a pioneer of recorded sound, a German-born American named Emile Berliner, who founded the Gramophone Company. As a result of a merger in the 1930s, it was renamed Electric and Musical Industries Limited.

It was 30 years later that a man named Brian Epstein walked through the doors with a tape from a new band called the Beatles. Frank Sinatra, the Rolling Stones and Marvin Gaye have all called EMI home.

“EMI and the companies that formed it made London a center for musical culture in a way it never was,” said Peter Martland, a professor at Cambridge University and author of “EMI: The First 100 Years. “There is a lot of history there.”

But the music business, even in good times, is not welcoming to outsiders. The sensibilities of a financier like Mr. Hands are usually starkly at odds with the folkways of a creative enterprise. Artists’ egos need stroking, and the measurement of success is not the same in music as it would be in running service stations along the autobahn.

“You have to understand the artist’s psyche to make it work,” said Jazz Summers, who manages The Verve, a band signed to EMI, and was present at the dinner last autumn.

The story has even turned comical at times. After Mr. Hands discovered that some employees were laundering costs for things that were illegal (drugs and prostitutes, he said), by itemizing them on expense reports as “fruit and flowers,” he set a strict travel and entertainment policy that required receipts for every expense.

Photo

Other artists distributed by EMI include Chris Martin of Coldplay.Credit
Mario Anzuon/Reuters

Artists, too, have clashed more openly with Mr. Hands: the band Radiohead has fled and the singer Joss Stone has asked to be let out of her contract. The Rolling Stones, meanwhile, have been talking with other record companies about a new label. (If the Stones left EMI, it would have little impact financially, because the company would still have the rights to the band’s catalog).

“They hate him,” said Hugh Hendry, a British hedge fund manager and former EMI shareholder who had publicly criticized past management, of artists’ opinions about Mr. Hands. “He’s rude. He’s abrasive. He wants to make money. He’s the first to say to artists, ‘We are not going to pay you too much money. Now get out of my office.’ ”

A glance at Mr. Hands’s résumé is enough to suggest a clash of cultures. Mr. Hands, 49, is an Oxford-educated financier — stints at Goldman Sachs and Nomura made him rich before he founded Terra Firma in 2002 — and he and his wife own and run a chain of country house-style hotels. Mr. Hands was ranked No. 12 on the Times of London’s list of 100 most influential figures in British business and has a reputation for being outspoken. (When cheap credit dried up, he called investment bankers “whimpering dogs,” The Times of London reported.)

Terra Firma’s portfolio of 25 companies ranges across industries, from a landfill operator to a betting shop to a company that leases jet airplanes. Mr. Hands retained the earlier management in just one of the 25, William Hill, which runs sports betting outlets.

So when he took over at EMI he entered a culture that none of his earlier experience had prepared him for. “It was like we had unlocked years of internal battles with a psychotherapy session,” he said. “It was extraordinary.”

At first managers gave Mr. Hands the benefit of the doubt — they had seen their business decline and were desperate for a new approach.

“He said, this is what I do,” said Mr. Summers. “I took over failed pubs, and it worked. I took over failed service stations in Germany, and it worked. We put in new toilets. At first, I thought he was bright.”

But according to Mr. Hands, the company was doing worse than commonly thought. An analysis by McKinsey and KPMG found that EMI had lost £750 million ($1.5 billion) from selling new music over the last five years.

An error has occurred. Please try again later.

You are already subscribed to this email.

“We didn’t believe it at first,” he said, explaining that the figures that EMI previously reported counted sales of re-releases of music from old acts like the Beatles as new music revenue.

“They were doing everything they could to hide the fact that they were losing huge amounts of money in new music,” he said. “The good news was they were making a fortune in catalog.”

So far this year EMI’s market share in the United States has declined to 8.8 percent from 10.7 percent, according to Nielsen SoundScan, the largest drop among the four major music companies. An album from its top-selling band Coldplay will be out Tuesday, and robust sales could polish EMI’s image.

But even this would belie tension within the company, as Coldplay agreed to release the album only on the condition that EMI pay for the band’s management to hire its own marketing and publicity team, rather than rely on EMI employees.

For EMI, the news became a little worse as the credit crisis grew. Last year Citigroup, which also advised EMI’s previous board in the sale, lent Terra Firma nearly $5 billion to finance the deal. The timing couldn’t have been worse for the investment bank. “The loan was done at the very end of the credit boom,” Mr. Hands said.

As a result, Citigroup has been unable to syndicate the debt, giving Citigroup leverage over EMI should the company start hemorrhaging money. If the debt were spread among numerous investors, EMI would have more breathing room.

Photo

The Rolling Stones are also distributed by EMI.Credit
Associated Press

In a recent letter to his investors, Mr. Hands wrote: “Clearly, this is a time when all banks are under tremendous pressure, but this is not ideal for EMI. In all leveraged buyouts, your bank is your partner, and we have worked hard, and continue to work hard, to see if there are ways to help Citigroup syndicate or sell down this loan.”

From the beginning, Mr. Hands did little to ingratiate himself either to EMI’s own employees or executives within the industry, a famously clubby business wary of outsiders. He acknowledged that he is not a music person, and has turned down invitations to visit the recording studio to watch artists’ recording sessions.

EMI also instituted a ban on international travel without prior approval and barred employees from attending industry events “unless these are specific profit delivering activities.”

Earlier this year Mr. Hands spoke at a private equity conference in Munich and was asked the difference between the work habits of the music and finance industries. “I said Terra Firma people get in very early in the morning, work through the day, and go home,” he said. “In contrast, people in the music industry get in to work later, work later and then go out late to the clubs and look for bands.”

This, according to Mr. Hands, is what set off a storm of protest from artists and managers in the British press.

“He had this disastrous publicity campaign,” Mr. Summers said. “I thought it was terrible for the staff. And he was saying artists were all lazy.”

Mr. Hands’s vision appears to be this: split the marketing function from the development of talent — called “A&R” for “artist and repertoire” in the parlance of the music business; and sharply cut costs by reducing artist advances and paying less on marketing music.

In a confidential business plan showed to investors last year, Terra Firma said one way to reduce costs would be to use social networking sites to “source new acts and as a means to test public reaction to individual acts.”

“Getting rid of management teams and starting afresh is something we’ve always done,” Mr. Hands said. And some of the biggest new hires have come from outside the music industry. An executive from Google was hired to run the digital business, and the creator of Second Life, the Web-based virtual world, was recently hired to work on digital initiatives.

In that document, Terra Firma projected that EMI’s earnings before interest, taxes, depreciation and amortization would grow from £167 million ($325 million) in 2007 to £580 million ($1.1 billion) in 2010, growth that seems at odds with industry trends. (Merrill Lynch, for example, projects that the Ebitda of Warner Music will decline slightly over that time, from $461 million to $444 million.)

To keep costs down, Mr. Hands has clamped down on expenses while he has waited — the company is still waiting — for widespread layoffs. But despite those measures, the company will not meet a cash-flow target as part of its covenants with its lender Citigroup. So he negotiated a three-month extension.

“We both agreed that June was far too early,” Mr. Hands said, noting that Terra Firma had a cash reserve of about $500 million raised from a Canadian pension fund. “It looks like the company will be fine by September. If it’s not fine, we have a cash reserve that will get us through to 2010.”

But the fate of EMI as an independent record company is unclear. Many within the industry expect the company to once again fall into a dance with Warner Music — the two companies have attempted numerous mergers in recent years. There has been wide speculation that if EMI were to fail to meet its debt covenant in September, Citigroup would step in and force EMI to merge with Warner.

For now, Mr. Hands is trying to fix EMI’s business so that its fate remains in his control rather than Citigroup’s. “It’s going to take a lot less arrogance and a lot more honesty,” he said. “It’s going to take a new direction, new management and change.”

But it’s not clear that EMI’s place in the music business — or as a cherished English institution like the BBC — will survive either way. “I think the analogy to the BBC is very good,” said Rupert Perry, a former senior executive who worked at EMI for more than 30 years. “I wouldn’t say it’s that way today. In its time and history, it dominated the world.”

A version of this article appears in print on , on Page C1 of the New York edition with the headline: EMI’s New Boss Sees Cracks In Music World. Order Reprints|Today's Paper|Subscribe